Costa Rica Politics September 2019

Costa Rica: Government proposes tightening the belt in 2020

September 9, 2019

On 30 August, the fiscally-strained government of Costa Rica presented to Congress its 2020 budget proposal, which outlines cutting spending by 4.3% compared to this year. While this could clip domestic demand somewhat, the effect on the economy should be limited by the fact that the majority of the savings are expected to come from a significant cut in debt repayment costs. The closely watched fiscal deficit should narrow on the back of the government’s cutbacks, although the public debt ratio will continue rising notably.

Current expenditure, which includes spending in areas such as public salaries and services, and accounts for the majority of total spending, is proposed to increase 3.9% in 2020, which would represent the slowest increase in the past decade. This proposed increase is also below the maximum allowed increase in 2020 of 4.7%, according to the new fiscal rule that recently came into effect which limits current expenditure increases based on how fast the economy is growing.

Spending in 2020 is planned to be financed 52.0% through tax and 48.0% through debt. This represents a notable improvement compared to this year—currently, 46.7% of spending is funded by tax and 53.3% is funded by debt—and is partly due to the VAT on goods and services that came into effect in July, which replaces an old sales tax on goods.

On reflection, Fernando Fallas Jiménez, economic analyst at Ecoanálisis, said: “The 2020 budget represents a cut of 4.3%, which is a positive sign for investors and the general population, as the government is taking steps to contain public spending.” Reducing the fiscal burden is key, as according to Jiménez, “debt repayment costs limit the funds available for education, infrastructure, or fiscal stimulus”.

FocusEconomics Consensus Forecast panelists forecast the fiscal deficit to widen to 6.0% in 2019 before narrowing to 5.8% in 2020. In terms of public debt, our panelists see public debt as a % of GDP rising to 58.3% in 2019 and 60.7% in 2020.

At its monetary policy meeting on 29 April, the Central Bank of Costa Rica (BCCR) left the monetary policy rate (MPR) unchanged at 1.25%, where it has been since being cut by 25 basis points on 16 March to help mitigate the negative economic effects of the coronavirus pandemic and associated social distancing measures.
This comes after the BCCR estimated on 24 April that the Costa Rican economy would contract 3.6% this year, with the greatest contractions in the second and third quarters, followed by a recovery in 2021 of 2.3%.

Annual economic growth in cyclically-adjusted terms accelerated mildly to 2.7% in February from the revised 2.6% reading in January (previously reported: +2.5% year-on-year).
February’s result was supported by healthy growth in the manufacturing sector and information and communication technology sector.

Sign up for our newsletter

Cookies Policy: We use third-party cookies to improve our services by analyzing your browsing habits.
By continuing to use this website you are giving consent to cookies being used. For more information on cookies and how you can disable them, see our "Cookies Policy".
Close